In November 2016 in GST council meet government decided multiple GST rates maximum will be 28%+cess on ultra luxury products,tobacco products,aerated drinks etc.Lowest slab 5% will be levied on common consumption such as spices,tea,edible oil etc,12% to be on processed food items,Refrigerator,smart phones,Other FMCG products such as soap,toothpaste etc will attract 18% while white foods and normal cars to be in 28% slab. GST rate for gold is yet to be decided.Upto 50% of CPI basket items including foodgrain is exempted.Most of the services will get expensive as broadly thye will be taxed at 18% against 15% today.GST rollout is expected to have inflationary impact on economy.
On 3rd August 2016 Goods and Services Tax (GST) bill was passed by the parliament with amendments. GST is one of the key tax reforms for the Indian economy and is likely to implemented in FY18.
Introduction
What is GST?
GST is Goods and Services Tax and it is a major Indirect Tax reform in India. The proposed GST is a comprehensive tax structure based on manufacture, sale and consumption of goods and services, with individual central and state components in the tax structure as CGST (Central Goods and Services Tax) and SGST (States Goods and Services Tax).
Cenvat and State VAT
Currently both the CENVAT (Central Value Added Tax) and the State VAT (Value Added Tax) frameworks are used in the system, but both have certain incompleteness. CENVAT is not yet been extended to include chain of value addition in the distributive trade below the stage of production. It has also subsumed several Central taxes, such as Additional Excise Duties, Additional Customs Duty, Surcharges in the overall framework of CENVAT and and thus kept the benefits of comprehensive input tax and service tax set-off, out of the reach of manufacturers and dealers. In the present State level VAT scheme, CENVAT load on the goods has not been removed and the cascading effect of that part of tax burden has remained there. Moreover, there are several taxes in the States, such as, Luxury Tax, Entertainment Tax, etc. which have still not been subsumed in the VAT. There has also not been any integration of VAT on goods with tax on services at the State level with removal of cascading effect of service tax. Burden of Central Sales Tax (CST) has also not been removed fully.
The introduction of GST will try to reduce burden of double taxation by removing these taxes. Proposed GST is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholeseller and one retailer, how GST will work.
Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 13. The manufacturer sells the goods to the wholesaler. When the wholesaler sells the same goods after making value addition of (say) Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholeseller. Thus, the manufacturer, wholeseller and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting-off GST paid at the earlier stages. The overall burden of GST on the goods is thus much less. This is shown in the table below.
Comprehensive GST framework will incentivise large number of producers to register themselves into the tax system so as not to affect their competitive edge.
GST’s impact on economy
GST can increase the efficiency of doing business in India by reducing cost (lower taxation and filing cost) and increasing profitability, which subsequently helps GDP and investment growth. It can boost exports as lower taxation and filing costs improve price competitiveness of Indian goods abroad. Strong GST framework can improve tax compliance and increase tax revenue. According to study by NCAER (National Council for Applied Economics and Research) complete implementation of GST could lift GDP growth by 0.9-1.7%.
